Sales Comparison Grid & Cost to Cure

[Zoe]

Dear Zoe,

Your services are no longer required.

Regards,

Slipshot AMC

Your getting better at sarcasm. Keep working on it. LOL

 

[George Hatch]

Thanks for the feedback everyone. I've used cost to cure in the cost approach and listed cost to cure items in an addendum many times - never had a lender insist that these items be added to the sales grid. Also never had a lender refuse to allow an extraordinary assumption. Maybe just a bad lender - noted for future dealings.

You're getting your terms mixed up, so that's not helping anything. You based your appraisal on a hypothetical condition, not an extraordinary assumption.

An assumption is when you think something is true but you're not 100% sure. "The reported rents are $2000/month". They told you it was $2,000, you had reason to believe it's $2000, your rent survey supports a market rent of $2000, but you can't be 100% sure so in lieu of info to the contrary you are proceeding under the assumption that the information is true. The assumption that the info you're using is true is so common that it's considered a standard assumption - we use such assumptions all the time because it's basically impossible to "know" everything about everything - we have to work with the info that's available.

We use so many assumptions that some of them are hardwired into the addenda of the appraisal forms. The only difference between one of these standard assumptions vs an Extraordinary Assumption is that the latter is specific to this assignment and wouldn't necessarily apply to any other assignment. Another way to think of EAs would be to consider them an assignment-specific assumption. I wouldn't necessarily use that term in a report because readers might not understand it, but thinking of it that way might help you to understand the difference.

So in the scenario you described you KNOW the roof is incomplete, but for the purposes of analysis you made the appraisal "subject to" the completion of the repairs. The longform description of what you did was that you valued the property "subject to completion of repairs per specs" based on the hypothetical that the repairs were already completed as of your effective data. You used an if/then hypothesis (IF the roof was complete today THEN the value would be $zzz). AKA a hypothetical condition.

You're not required to use any label to describe what you're doing, and indeed, most of your readers wouldn't understand it correctly anyway. What's important is that you do disclose what you're doing and tell the reader that if the assumption is incorrect or the "subject to" doesn't occur then it will have an effect on your opinions and conclusions.

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Now where you're running into problems in this assignment is the client apparently asked for and expected the "as is", not the "subject to". It's okay to add both, but if they ordered it "as is" then at a minimum you need to provide that. Now personally I would always add in the "subject to" in this situation even if they didn't ask for it, but that's not a requirement in either USPAP or (apparently) your clients expectations and appraisal policy. It's a discretionary move on my part that I use to demonstrate the effect on value of the hypothetical, and I add both the additional value and the explanation in the narrative. When the "As is" is the thing then that's the value that goes on the bottom line of the form. OTOH, when the "subject to" is the thing then THAT'S the applicable checkbox and the value that goes on the bottom line.

Always pay attention to what the client is asking for and what the (legitimate) requirements and expectations are for the assignment.

 

[RSW]

The OP's first mistake was not notifying the client about the roof. The second mistake was using an EA. A hypothetical condition should have been used.

 

[Fernando]

Well, let this be a lesson to you in dealing with AMC's. They most likely ordered it "as is". Once you returned to the office, before even touching your keyboard, you should have contacted the AMC stating that the roof was not finished. They would have put it on hold or instructed you to do a cost to cure. This would have saved you all that time in writing up an extraordinary assumption and checking the appraisal subject to completion.

As Terrel and Mejappz pointed out, you can do the cost to cure. Get the cost from the borrower, add a bit for entrepreneurial incentive and be on your way. Don't forget a cya disclaimer

"The estimated cost to cure to finish the roofing is $xx,zzz. This amount is reflected in both the cost and market approaches to value. The appraiser is not a general building contractor and therefore cannot guarantee the above stated cost estimates. Inspection by a licensed and qualified General roofing contractor can possibly provide accurate cost estimates. Should a subsequent inspection reveal more significant costs than estimated within the scope of this appraisal, the appraiser reserves the right to change the final estimate of Market value".

Oh, don't forget to add a comment in the addendum about this condition change and change your signature date. Because there's two appraisals out there now with different values.

I never understood why client sends appraiser to a property under renovation. It should have been the loan agent duty to discuss this obstacle before sending out the appraiser.
I say to owner I don't make lending decisions but you should check with your lender if your current condition is acceptable.
Save lot of pain for everyone.

 

[TekJ42]

You're getting your terms mixed up, so that's not helping anything. You based your appraisal on a hypothetical condition, not an extraordinary assumption.

An assumption is when you think something is true but you're not 100% sure. "The reported rents are $2000/month". They told you it was $2,000, you had reason to believe it's $2000, your rent survey supports a market rent of $2000, but you can't be 100% sure so in lieu of info to the contrary you are proceeding under the assumption that the information is true. The assumption that the info you're using is true is so common that it's considered a standard assumption - we use such assumptions all the time because it's basically impossible to "know" everything about everything - we have to work with the info that's available.

We use so many assumptions that some of them are hardwired into the addenda of the appraisal forms. The only difference between one of these standard assumptions vs an Extraordinary Assumption is that the latter is specific to this assignment and wouldn't necessarily apply to any other assignment. Another way to think of EAs would be to consider them an assignment-specific assumption. I wouldn't necessarily use that term in a report because readers might not understand it, but thinking of it that way might help you to understand the difference.

So in the scenario you described you KNOW the roof is incomplete, but for the purposes of analysis you made the appraisal "subject to" the completion of the repairs. The longform description of what you did was that you valued the property "subject to completion of repairs per specs" based on the hypothetical that the repairs were already completed as of your effective data. You used an if/then hypothesis (IF the roof was complete today THEN the value would be $zzz). AKA a hypothetical condition.

You're not required to use any label to describe what you're doing, and indeed, most of your readers wouldn't understand it correctly anyway. What's important is that you do disclose what you're doing and tell the reader that if the assumption is incorrect or the "subject to" doesn't occur then it will have an effect on your opinions and conclusions.

----------
Now where you're running into problems in this assignment is the client apparently asked for and expected the "as is", not the "subject to". It's okay to add both, but if they ordered it "as is" then at a minimum you need to provide that. Now personally I would always add in the "subject to" in this situation even if they didn't ask for it, but that's not a requirement in either USPAP or (apparently) your clients expectations and appraisal policy. It's a discretionary move on my part that I use to demonstrate the effect on value of the hypothetical, and I add both the additional value and the explanation in the narrative. When the "As is" is the thing then that's the value that goes on the bottom line of the form. OTOH, when the "subject to" is the thing then THAT'S the applicable checkbox and the value that goes on the bottom line.

Always pay attention to what the client is asking for and what the (legitimate) requirements and expectations are for the assignment.

Thanks for your detailed response. Curious - do you use cost derived adjustments in the sales comparison approach in your practice?

 

[TekJ42]

Exactly. Seems a lot of people overload a circuit when they try to put the FNMA round rules into a square hole...
Non-conforming loans REQUIRE an "as is" value - period.

It is too late for the easy solution. Call the client and see if they want to wait a few days until the roof is done, or if they want it "as is" with cost to cure. Never hesitate to call the client.

Interesting - every AMC I have dealt with specifically prohibits direct communication with the client. I offered to go back to verify the roof was complete (for free) and they refused (yes - really).

 

[Surf Cat]

I never understood why client sends appraiser to a property under renovation. It should have been the loan agent duty to discuss this obstacle before sending out the appraiser.
I say to owner I don't make lending decisions but you should check with your lender if your current condition is acceptable.
Save lot of pain for everyone.

First of all, the owner is not the client, I wouldn't tell them anything. Secondly, the lenders don't know the particulars of the subject property. They just want to process the loan. They send us out for that. Maybe the borrower withheld vital information....lots of unknowns.

The OP should have contacted the lender, but he didn't. Either he makes the appraisal as is with a cost to cure or he refuses and loses a client. It's pretty simple.

 

[TekJ42]

I just had one where contract had new roof in it and agent asked me if I wanted to go ahead or wait and I said I can go ahead because I know how roofers are and sometimes they are way slower than they say they are and it will be quicker in the long run. It had other required repairs as well. So it was going to be subject to regardless.

But, in this case the OP has ..............it probably would have been easier to wait until roof was completed.

First order for this lender - didn't see the 'as-is' assignment condition until the validation screen before delivery. Had my 'subject-to' converted to .env ready to go ... have delivered numerous reports using EA (incorrectly, apparently) for in-progress / almost finished renovations. First time Ive had it rejected. Its my fault for not reading every word of every engagement letter for every assignment we receive. I won't make this mistake again.

 

[TekJ42]

First of all, the owner is not the client, I wouldn't tell them anything. Secondly, the lenders don't know the particulars of the subject property. They just want to process the loan. They send us out for that. Maybe the borrower withheld vital information....lots of unknowns.

The OP should have contacted the lender, but he didn't. Either he makes the appraisal as is with a cost to cure or he refuses and loses a client. It's pretty simple.

Actually, I changed the subject's condition rating and modified the condition adjustment for all comparables with some very specific language in the addendum. As of the effective date the subject had no roof covering - so we adjusted the condition as though the subject's roof was severely damaged. Feels more correct than a cost derived adjustment jammed into a line item in the sales grid. They seem to have bought it for now... tomorrow is another day though.

 

[TekJ42]

I never understood why client sends appraiser to a property under renovation. It should have been the loan agent duty to discuss this obstacle before sending out the appraiser.
I say to owner I don't make lending decisions but you should check with your lender if your current condition is acceptable.
Save lot of pain for everyone.

I don't think the (client) knew - the borrower either told them it would be finished or didn't think it mattered enough to mention it. Either way its my fault for not reading every word of the engagement letter / asking the POC about ongoing renovations. Honestly its never been a problem before.